UK insolvency rate falls to 8 year low

The quantity of reported insolvencies in England Wales dropped to an 8 year low during 2013, according to official government data.

Just over 101,000 people were recorded as being insolvent last year, which represented the smallest number since 2005, whilst there was also positive news for the countryís businesses, where just under 15,000 were liquidated last year, the smallest total since 2007.

Insolvency is classified as the process in which the collective value of someoneís liabilities outweighs the total value of their assets, and is a basic requirement for anyone to be if they wish to acquire an insolvency voluntary arrangement to tackle their debt problems.

However, the government warned that whilst the statistics are undeniably positive, that they are nevertheless vastly higher than the pre-recession figures, and that more work still needs to be done in order to improve the financial wellbeing of people across the UK.

Rate rises ëserious trouble’
The governmentís figures indicated that the total number of people declaring themselves insolvent during 2013 dropped by 8%, which is staggering considering that the country is said to be undergoing a ëcost of living crisisí at the moment.

A primary factor identified for the improvement has been the activity of banks, and credit lenders, who have made it harder for applicants to acquire finance in the past year.

“It’s a combination of the fact that consumer lending has been subdued for the last five years, together with forbearance on credit cards,” said Mark Sands, partner at insolvency specialists Baker Tilly.

However, many financial experts have argued that the positive trajectory of insolvencies is meaningless until peopleís finances are tested by interest rate rises in the future.

The Bank of England has kept their base interest rate at a historic low of 0.5% for almost 5 years now, though the recent upturn in the countryís economy has led many economists to call for a rise in the near future.

Though the Bank is set to announce a change in their forward guidance policy this week, connecting the future of interest rates to different parameters than the previous unemployment rate, it is still though that they will wait to at least 2015 before implementing a rise, and it is during this time that real assessments can be made about the countryís insolvency rate, specialists have argued.

“For me, the acid test for personal insolvency will be when the Bank of England starts to raise interest rates and people’s mortgage payments follow suit,” said Bev Budsworth, managing director of Debt Advisor, an insolvency practitioner.

The improvement within business insolvencies has been attributed to the historically low interest rates as well, where it has been argued that the ease in which companies have acquired low rate finance has helped them tackle their cash flow difficulties.

However, insolvency specialist David Birne, has identified that businesses will begin to struggle again when rates rise, and has warned against the culture of ëhanging oní that is developing within the business world.

“These are the best insolvency figures we’ve seen in a while,” said David Birne, insolvency partner at chartered accountants HW Fisher.

“But with many of Britain’s businesses still just ‘hanging on’, thousands of our weaker firms are far from out of the woods yet.”

“Sooner or later, interest rates will rise and bank forbearance will end – and when that happens the weaker firms will be in serious trouble,” he added.

Inconclusive and misleading

Despite the statistics painting an overwhelmingly positive picture of the complexion of Britainís personal finances, it has been argued that the data is misleading and inconclusive due to the fact that it does not include details of the number of people utilising other debt solutions that do not  require insolvency as a primary condition.

In particular, all data of those using Debt Management Plans have been left out, despite the fact that this is the most common solution utilised by those suffering financial difficulties.

This view was shared by insolvency organisation R3, who argued that the figures do not give an accurate representation of the full scale of the countryís financial difficulties.

“Until the government begins to monitor new DMPs, the true scale of personal insolvencies in England and Wales will be hidden,” said Giles Frampton, R3’s vice president.

“Many people will have done their best to avoid insolvency in the run-up to Christmas, so there will be fallout from that in January and February,” he added.

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